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Dutch Bros Is Solid Enough for a Modest Bet

If 2020 was the year of the novel coronavirus, 2021 could be considered the year of excess. From cryptocurrencies to meme trades to initial public offerings (including the much-publicized special purpose acquisition companies), the market has moved quickly — perhaps too quickly. However, Dutch Bros (NYSE:BROS) stock demonstrates that hype doesn’t always portend disaster.

Dutch Brothers (BROS) at Papago Plaza in Scottsdale Arizona.
Source: RicoPatagonia /

In fact, BROS stock has had quite the debut since its September IPO.

Back then, I covered the public market debut for Benzinga, noting that the company started from humble beginnings to blossoming into the largest privately held drive-thru coffee chain in the U.S. Since then, of course, it’s become a public enterprise, with the company originally aiming for a $421 million raise in its IPO. As I write this, BROS stock has a market capitalization of slightly over $2 billion.

On many levels, it’s difficult not to root for Dutch Bros. For instance, not only does the company provide a competitive alternative to Starbucks (NASDAQ:SBUX) in the markets it serves, Dutch has a fun persona that caters to young consumers. That’s also got to be attractive for older consumers, who have over the years grown tired of Starbucks’ eager willingness to mire itself in politics.

Obviously, companies can do whatever they want. Further, there’s a risk in being too quiet about core fundamental issues. But what likely resonates most with the Dutch Bros brand is the quality of the drinks, not management’s stance on the issues of the day. Ultimately, that’s a net positive for BROS stock.

Further, Dutch Bros is a local hero to Oregonians, with the company headquartered in Grants Pass. As journalist Mike Rogoway wrote for The Oregonian, “No Oregon company has raised more than $100 million in an IPO since 2004, and the state hasn’t produced any really large new companies in decades.”

BROS Stock Is Popular, But Some Risks Loom Large

With the outsized performance of the BROS stock IPO, the Beaver State has a new rooting interest on Wall Street. And while the searing market for fresh public issues is a concern for those worried about an overheated situation, for now, the coffee chain is firing on all cylinders.

Recently, management disclosed very encouraging numbers for its third-quarter earnings report. On the top line, revenue of $129.8 million represented an almost 50% year-over-year growth rate, beating out the consensus target of $124.9 million. As well, same-store sales increased by 7.3% in the third quarter and by 10.7% on a two-year basis.

Additionally, Dutch Bros provided an optimistic outlook, indicating that it sees sales in the fourth quarter hitting $125 million to $128 million. That’s conspicuously above the consensus estimate of $121.2 million. In an IPO market which also features the heavily dilutive SPAC offering, it’s good to see BROS stock deliver technically and fundamentally for its stakeholders.

Moving forward, the company should also benefit from the normalization of society. The desire to reclaim what was lost from Covid-19 runs strongly, delivering a record-breaking Halloween season. It stands to reason that consumers will be eager to reclaim other components of daily life, including visitations to popular coffee chains.

Still, there’s one factor that should give prospective pause. During the earnings conference call, management reiterated its long-term potential of building out 4,000 shops nationwide. As our own Stavros Georgiadis pointed out, there are concerns “about the capital expenditures the company would require to expand from 471 locations to almost 10x that amount within a few years.”

And that’s a great point. Beverage-related businesses feature low barriers to entry. As soon as those expenditures pile up, the case for BROS stock could become much trickier.

Buy Some Now, Wait for a Discount Later

At the same time, I think the market being the way that it is, there’s a risk in being too pensive. That’s something that I’m reminded about constantly. You can look at this statistic in many ways but Bloomberg did point out that $2.7 trillion in crisis savings still remain hoarded and theoretically ready to be spent.

Perhaps it’s unlikely. Still, from a mathematical perspective, this bull could still have legs. That’s why if you believe in BROS stock, you should seriously consider at least modest exposure now, even at a premium.

But I also take Georgiadis’ warnings seriously. Expanding the business is going to be super risky and Wall Street might not appreciate it if the company doesn’t produce adequate results in its new markets. Therefore, it’s also smart to keep the powder dry. It’s very possible that BROS could see some volatility in the next several months.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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